Do I Need a New Trump Strategy?

December 2024 Newsletter

In this Newsletter, I share my thoughts about whether you need (or don’t need) to change your portfolio strategy as we approach some potential political chaos in the US.

There’s nothing scarier than changes brought about by a rotation of political parties.  The fear ranks up there with wars, recessions, and spiders. I know that many of you share this fear as I get allot of questions regarding this – more so than most other topics. People ask: “are you worried?”, and “what are you going to do?” on a regular basis.

The quick answer is that I’m not worried and I’m only going to tweak my portfolio a little bit, and not for the obvious reason.

Rationale

Donald Trump is scary to some, loved by others, and creates allot of uncertainty and noise in the markets.  His changes will result in some stocks becoming winners and others becoming losers. Basically, wealth gets moved around when political parties change.  It’s not necessarily good or bad, it’s just something that happens in the markets and it’s common.  Think of it this way: the market is always pricing in new information, whether it be related to economics, politics or even the weather. This is not new.

Some will say that this time is different.  That could be true; Donald might run the country into the ground like Venezuela.  It’s always possible, the thought of it does create market uncertainty.  The question however, is not whether it’s possible, but if it’s likely.  In investing, you need to play the odds, even though at some point an unlikely black swan event could tip over the apple cart. So is Donald Trump the black swan?  Maybe. Maybe not. I always like to note that generally, you never see the black swan coming.

It’s not like he has never been president before.  We also know that allot of the things he promises, he never delivers. He also doesn’t not control many of the things he thinks or says that he does, such as interest rates.  Much of his policy rhetoric simply does not make sense.  We are going to have to wait and see what he does to better understand the implications on the market and which sectors/companies will benefit or lose out.  

Can Any Of This Be Gamed To Our Advantage?

With a president that is so unfocused and inconsistent, it’s nearly impossible for the small investor to reposition their portfolio effectively. Any direct investment angle has problems.  A simple example is that Trump wants to lower interest rates to boost the economy.  But that can trigger consumer buying and increase inflation.  Inflation will cause lots of problems that only higher rates can fix.  He wants to “Drill, Drill, Drill” for more oil, but that is counter Elon Musk’s electrification of cars and homes. It would also lower the price of oil and lower the incentive to drill.  His policies are full of these conflicts. So, will he actually lower or remove income tax? Will he really put tariffs on all goods coming into the country? Will he deport all the cheap labour?  I have no clue.  He will inevitably do some of it. 

The Obvious Question: What Am I Going To Do?

As a long time investor, I have seen all kinds of uncertainty and will likely see much more in the future. It’s part of the game. The world will not end.  What I can say is that with uncertainty comes opportunity.  I will continue to watch what happens and when a good company becomes out of favour, that is the time to add it to the portfolio for the long run.  Cheap but good companies eventually come back up and create above average returns.

But Wait – There’s More

What people are missing though, because they are focused on Trump, is that there are other forces in play that affect the market that have big repercussions on future stock market returns. Your returns!

These forces are the ones that I worry about much more than the Trump bets.  Investors have become accustomed to double digit returns for the last 15 years or so.  This is not entirely normal.  It’s wonderful that many of us got rich over this period, but risk has increased in many areas of the market.  So the question becomes:  “Now that we are rich, how do we stay rich”? 

The danger is that there can be a reversal to the mean in returns.  If you believe that long term market returns should be about 9% but have been returning 14% for a long time, that trend will need to reverse down sooner or later to stay in line with the 9% average. As a result, future returns would have to average 4-5% or worse for a long period of time to make the mean reversion work.

The worst case scenario is if the market gets hit with a sudden 50% crash. Sounds harsh but there is no reason why it cannot fall 50 % to price the affordability of the market back to levels seen only a decade ago.  I bought Apple at a PE ratio of 9 back then, it trades at about 40 now.  That is 4 times more expensive for the earnings it creates.  Apple is not growing like it used to – it’s just too big. It is a great company, but will it outperform the market going forward?  It will be much harder. So why could it not be repriced 50% less? The same logic can be used to reprice the entire market, or at least the most expensive part. 

Market Risk Is Not Equally Shared

The biggest risk in the market is found in the US, as returns have been outperforming the rest of the world for a long time. More specifically, the issue lies with big technology companies like the Magnificent Seven, which have been the drivers of the market for the last couple of years. Everything else has underperformed and are cheap relative to these.

This weirdness in the market was captured by JP Morgan in November. They worked out that the average investor was up only 3.7% this year.  If you did not have the darlings of the Market in your portfolio, you missed out on the big gains.

Crystal Ball Time

I like to use history as a way to figure out the future.  There are recurring patterns that create some probability advantage.  For instance, the market tends to be really good into the last year of the presidential cycle (like now). It’s also good for the first part of the first year of the new presidential cycle (starting in January 2025).

History also says, there will be great volatility that first year of the presidential cycle – mostly because the president has the most power in his first year, so he can muck things up or shine bright. This means fabulous gains (20+ % returns), or really bad returns (-20% or more) – not much in the middle.

So now that you see what I see, you realize that there are some Trump policies that will create winners and losers, there are some lofty areas of the market, and there will likely be a big swing up or big swing down.  That is all that we know if history is consistent.

What Are My Plans Going Forward?

I will continue the strategy I set out at the beginning of the year, which has done really well.  Many of the things I called for did play out, for example being bullish when everyone was not, and making bigger bets on utilities and financials.  I was hoping that Tech would have rotated it out, but it’s fighting to stay number one.  Essentially for a small underperformance against the S&P 500 index, I have had a much safer portfolio. A 25.5% absolute gain is fantastic versus the 3.7% return of the average small investor.

Changes I plan to make relate more to keeping the gains that we have seen in the last two years (about 50% S&P500 return).  I will likely pare down some positions that have become lofty.  Apple is likely one of these but not the only one.  I plan to increase undervalued sectors like consumer staples such as groceries and agriculture – I am still working this out.  I will also lower or swap out some Tech positions. I will concentrate on higher quality and more defensive boring stocks.  

Some Advice

As some of you know, I’m a big fan of Market ETFs and for those who have bought these based on my advice, you have done fabulously.  I am now, however, getting closer to thinking that it may be prudent to pare down Market ETFs in favour of more reasonably priced ETFs.  These can be found in the consumer staples ETFs, for example, or in other market indexes such as Europe or Asia.  Essentially, I am suggesting a bit of diversification away from US markets. If you choose to do nothing and keep your market ETF, in the very long run you will likely be fine, but if you want to lower risk, diversification is never a bad thing.

It is difficult to call a reversal or slow down in the market.  Any big portfolio deviation away from the market tends to work against the investor.  I also realize that I will likely be early in getting more defensive, however I am willing to lower my returns a bit in order to strengthen the portfolio. Next year could go either way, so it’s not prudent to go cash, but it’s also not prudent to load up on expensive Tech. I also believe that we have some time to adjust the positions.  There does not seem to be anything at the moment to suggest that a reversal or recession is coming in the next few months.

Marc’s Monthly Moves

• No buys or sells

Marc’s Portfolio YTD Performance

• Portfolio return: 25.5 % (including currency gains)
• Portfolio return: 21.5 % (without currency gains)
• S&P 500 return: 26.5 %
• RSP ETF S&P equal weight 18.9 %
• TSX: 22.4%

The portfolio is under performing the S&P 500 by 5 % points.